The Infant Industry Argument: a Critical Scrutiny

Abstract: The discussion on infant industry intervention has been extensive and lengthy; the purpose of this paper is therefore to create a certain amount of clarity in the arguments presented by supporters of both free trade and protectionism. A literature survey is conducted to examine the initial ideas behind the infant industry argument, as well as discuss its possible benefits and main difficulties regarding implementation and performance assessment. A closer look is taken at the practicality of the argument by studying possible quantifications of the Mill-Bastable test and productivity growth measures. Findings include that infant industry intervention may be warranted under very strict circumstances while meeting a string of conditions. Without the presence of factors such as dynamic learning externalities, potential to mature and spillover effects; an infant firm operating under protection might never reach a level of international competitiveness and remain a burden on national welfare. Moreover, policymakers are often not able to assess these factors properly beforehand, which makes the decision on intervention extremely difficult and risky. However, the difficulty of implementation should not necessarily be a reason to deny developing countries their right to a more developed industrial sector.